Australia: Could the Admiralty Marshal be under-insured for the sale of an arrested vessel?

Shipping newsletter - Legalseas

Surely the answer to this question is a resounding no. However, as illustrated in the recent case of Bank of China, Singapore Branch v The Ship Hai Shi (No 3) [2013] FCA 660, (BOC v Hai Shi), it became apparent that the Federal Court of Australia's Admiralty Marshal may not be adequately insured against a marine incident (including a pollution incident or wreck removal), even in circumstances where he is carrying out the Federal Court's orders for the judicial sale of an arrested vessel.

In BOC v Hai Shi, Hai Shi, (the Vessel), was arrested on 15 January 2013 by International Bunker Services KK (IBSKK), off Hay Point in Queensland, for unpaid bunkers in the amount of US$610,000. On 17 January 2013, BOC filed a caveat against release in IBSKK's proceedings, claiming a debt of US$71.7 million for unpaid mortgage repayments. In late January 2013, IBSKK released the Vessel from its arrest and the Vessel was rearrested by BOC.

For all intents and purposes, the Vessel was treated as an abandoned vessel by the Court, as its owners did not enter an appearance in the arrest proceedings brought by BOC. Default judgment was entered into and orders were made for the judicial sale of the Vessel (Bank of China Singapore Branch v The Ship Hai Shi (No 2) [2013] FCA 225).

Early on in the judicial sale process, it came to light that the Vessel's P&I insurance and hull and machinery cover had lapsed in February 2013. This problem was further compounded by the following:

  1. unseaworthiness of the Vessel (gyro compass not working);
  2. the Vessel was anchored close to the Great Barrier Reef in the cyclone season;
  3. the bunker oil certificate had expired;
  4. the crew had not been paid for months; and
  5. questions as to the safety of the crew on board the Vessel in the above circumstances.

Of grave concern for the Marshal was the fact that the Vessel was unseaworthy and uninsured just off the Great Barrier Reef in the cyclone season. If the Vessel became involved in a marine incident and/or required wreck removal, who would be responsible for the costs of such an incident?

Section 7 of the Australian Federal Court's Marshal's Practice Note, ADM1, provides that the Marshal is to obtain indemnity insurance for the period that a vessel is in his custody and that such a cost is payable by the party issuing the arrest writ. ADM1 further states that the Marshal is not to hold commercial insurance for the benefit of any other party who has an interest in the vessel. However, ADM1 does not provide any guidance as to how much insurance cover the Marshal needs in order to adequately protect himself from liability in the specific circumstances of any arrest and sale, and it does not take into account the unique situation where a vessel has no insurance at all and is effectively abandoned by its owners.

BOC had taken out its own port risks insurance for the Vessel, which covered the Vessel within a 25 mile limit of Hay Point. This insurance provided P&I and hull and machinery insurance but BOC was the only named assured and the policy had a limit of US$30 million. The Marshal had his own insurance policy, with a limit of AU$100 million, which would respond to a marine incident. However, the costs of a wreck removal/marine pollution incident can far exceed this amount.

Commonwealth and Queensland legislation is not clear on where liability falls in the circumstances described above. There is a possibility that for certain purposes, the Marshal could be found to be the 'owner' of a vessel whilst it is under arrest, such that the Marshal could become liable for marine pollution costs and/or wreck removal costs1. There are also compulsory insurance requirements imposed upon the "owner" of a vessel under Commonwealth and Queensland legislation2, which the Marshal could be responsible for.

In BOC v Hai Shi, the Marshal was exercising his control of the Vessel at the direction of the Court, and under the Admiralty Act 1988 (Cth) and Admiralty Rules 1988 (Cth). However, there was a risk that the Marshal fell under the definition of "owner" under the relevant Acts. Whilst the Marshal did not have a right to possession of the Vessel3, the Marshal was standing in the place of the owner in having full conduct and control over the Vessel.

The Marshal considered obtaining an excess liability policy above the amount of the existing cover, for a period of 12 weeks during the sale process. This additional insurance was intended to respond to any and all claims that may be brought against an 'operator' of a vessel, including any strict liability claims (Excess Policy). Needless to say, the cost of an Excess Policy would have been considerable.

Ultimately, the Marshal did not obtain an Excess Policy and the Vessel was sold, without incident, in May 2013. However, this does not detract from the fact that the Marshal faced considerable exposure in the sale and, had an incident occurred, the Marshal could have been deemed to be the owner/operator of the Vessel and would have been liable for all costs arising from such an incident.

The Marshal, who has over 20 years' experience in the conduct of the Federal Court's Admiralty work, said the sale of the Vessel was one of the "hardest and most complicated judicial sales" he has had to deal with. This case raised such significant issues in respect of the Marshal's insurance that it has been listed as an agenda item by the Federal Court's Chief Justice at the Federal Court's Admiralty and Maritime Users' Group.

The protection afforded similar officers in other jurisdictions seems to differ from that in Australia. For example in Hong Kong, the Chief Bailiff has immunity from suit pursuant to the Crown Proceedings Ordinance (Cap. 300) and has no civil or criminal liability for a marine incident. Therefore the insurance sought by the Marshal in BOC v Hai Shi would not be required for the Chief Bailiff in Hong Kong, although there would remain a question of where incident risk ultimately lies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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